By Eric Dutram
Currently, Brazil dominates the economy of South America, comprising about half of the entire continent’s GDP from a PPP perspective. In total, Brazil’s GDP is about $2 trillion of the nearly $4 trillion South American economy, far outpacing the second place nation, Argentina and its $700 billion. As a result, many investors focus in on the country for exposure to the region, as the massive nation has a huge market, is growing quickly, and is a member of the increasingly important BRIC bloc.
Yet beyond this giant, investors still have a number of solid options which could also offer quality exposure to the growing economic region. While some look towards Argentina, the country remains riddled with inflation and a poor history, making it inappropriate for many looking for some semblance of stability in the space ("Is ARGT A Better Latin America ETF Pick?"). As a result, investors must look to smaller markets, chief among them are the Andean trio of Colombia, Peru, and Chile. While individually all three are not very big economies, together they combine to make a nearly trillion dollar economy (PPP).
Additionally, these three are also growing quite quickly—all have higher GDP growth than Brazil—and are seeing less in inflation their Portuguese speaking counterpart. Thanks to these factors, as well as strong commodity supplies and relatively stable political situations, they could be ideal for investors seeking to make allocations to the region besides in the behemoth of Brazil (see "Brazil Small-Cap ETF Showdown").
However, individual stock allocations to the region are still difficult, as most securities in the area still trade only on local exchanges. As a result, investors should look to a series of ETFs that target the space which can offer up some of the only exposure that U.S. investors have at their disposal, at least at this time. Below, we take a look at some of the top ways to play this region with ETFs and the key differences between the main funds in the space:
Colombia could be an interesting choice for investors thanks to its production of in-demand commodities, strong fiscal position, and close U.S. ties. Growth is also high in the nation, and the country has begun to slowly diversify its economy out of primary sectors, which could help to keep the economy surging ahead for years to come. However, there are some security issues still in the country, and some instability in neighbors could pose a concern for Colombia going forward (read "Five Cheaper ETFs You Probably Overlooked").
Currently, investors have two options in the space, the Global X FTSE Colombia 20 ETF (GXG) and the Market Vectors Colombia ETF (COLX). While the two are similar, there are some key differences between the funds. First, GXG has far more in assets and trading volume, but the fund does charge six basis points a year more in fees. Also, COLX has more securities in its basket and is less heavily concentrated in its top holdings, although both have a heavy dependence on financials and energy firms.
Another surging South American economy is in the mountainous nation of Peru. The country has a relatively high growth rate compared to many of its peers in the region, low debt, and growing integration with major world economies via free trade agreements. Additionally, the country is a major producer of silver, which given recent trends in the precious metal market, could act as a driver of total exports going forward. However, Peru still does have some issues, as the country does have a very high poverty rate and unemployment outside of the cities is rampant, a situation that could eventually drag down total growth rates.
To play the Peruvian economy, investors have the iShares MSCI All Peru Capped ETF (EPU) at their disposal. The fund uses a sampling technique to achieve its goal, investing in about 27 securities while charging 59 basis points a year in fees. Exposure is heavily concentrated in the basic materials sector (56% of the total), while financials also receive a sizable chunk at just over one-fifth of total assets. In these two sectors, the industry breakdown favors metals & mining, precious metals, and then broad banking.
Chile is another quality choice for investors seeking exposure to Latin America, and it could also be one of the more developed choices as well. The country has a relatively high GDP per capita that beats all other nations except for neighboring Argentina. Beyond this, the country is now known for low levels of corruption, high levels of economic freedom and competitiveness, and its vast mineral wealth. Chile is a major producer of base metals like copper and it is increasing exports of lithium as well.
For investors seeking an investment in this increasingly important economy, the iShares MSCI Chile Index Fund (ECH) looks to be the top choice. The product tracks the MSCI Chile Investable Market Index which looks to hold about 40 securities in its basket and charge investors 59 basis points a year in fees. Utilities take the top spot in the fund at about 22% of the assets, while basic materials (18%), industrials (18%), and financials (16%) round out the top four.
Broad Andean ETF
Additionally, investors should note that there is a broad way to play all three of these nations in a single ticker with the Global X FTSE Andean 40 ETF (AND). This product looks to follow the FTSE Andean 40 Index, giving investors access to the 40 biggest stocks that trade in any of the three Andean nations of Chile, Peru, and Colombia. The ETF does charge investors a rather steep 72 basis points a year in fees and also sees light volume of just 3,700 shares a day. However, it remains the only way to target exposure to the three countries by themselves without other nations being involved (read Three Overlooked Emerging Market ETFs).
From a holdings perspective, two Colombian firms take the top spots as Ecopetrol (EC) and Bancolombia (CIB) combine to make up about 18% of the total. Beyond this, Chilean firms comprise the most from a single country at about 40% while Colombia is second, and Peruvian firms are third. In terms of sector allocations, 75% of the fund is devoted to four sectors; basic materials and financials each make up about 25% of the fund while energy (15%) and utilities (11%) round out the next quarter of the total exposure profile.
Disclosure: Author is long AND.